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Fed says stress tests show improvement

Daniel Tarullo

March 24, 2014 – The Federal Reserve announced on Thursday that the summary results of its bank stress tests show that the largest banking institutions in the country are better situated than they were five years ago.

Federal Reserve Governor Daniel Tarullo said, “The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions. Each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago.

The most extreme stress scenario combined a deep recession with a sharp rise in unemployment, a drop in equity prices, and a decline in house prices. The test results shows that the aggregate tier 1 common capital ratio of the 30 tested firms – a ratio that compares high quality capital to risk-weighted assets – would fall from its current level of 11.5 percent to a minimum level of 7.6 percent under such a scenario. This is significantly higher than the result of 5.5 percent from the 2009 test.